(Updates with security firms' concern, paragraphs 8-10)

By Ross Colvin

BAGHDAD, Oct 30 (Reuters) - Iraq's cabinet approved a draft law on Tuesday to end foreign security firms' immunity from prosecution by scrapping a controversial decree that Iraqis say amounts to a "licence to kill".

The bill, which has to be approved by parliament, follows a Sept. 16 shooting incident involving Blackwater in which 17 Iraqis were killed. The U.S. security firm said its guards acted lawfully, but the shooting enraged the Iraqi government.

In Washington, a U.S. government official said efforts to bring charges in U.S. courts could be complicated by an offer of limited immunity to Blackwater security guards by State Department investigators. The New York Times said the investigators did not have the authority to make such an offer.

"The cabinet has approved a law that will put non-Iraqi firms and those they employ under Iraqi law," Iraqi government spokesman Ali al-Dabbagh told Reuters after a cabinet meeting.

Iraq says there are more than 180 mainly U.S. and European security companies in Iraq, with estimates of the number of private contractors ranging from 25,000 to 48,000.

Dabbagh said the bill proposed cancelling Order 17, a decree issued by the U.S.-led Coalition Provisional Authority (CPA) in 2004 shortly before it handed control to an interim Iraqi government.

A long-running a source of friction between Washington and Baghdad, the measure prevents foreign contractors from being prosecuted in local courts. Iraqi efforts to revoke it had got nowhere until the Blackwater shooting.

Private security contractors expressed concern at the prospect of losing immunity, saying it would expose them to the vagaries of the Iraqi judicial system, which the United Nations mission in Iraq said in its latest human rights report often failed to give defendants a fair hearing.

"People have concerns about the Iraqi court system. If the immunity is really being removed, there's going to be a lot of uneasiness," said Andy Bearpark, head of the British Association of Private Security Companies.

David Claridge, managing director of Janusian Security Risk Management which provides protection for foreign and Iraqi companies, said: "The concerns, naturally, would be around the ability of the Iraqi authorities to fairly apply the law to all companies and all individuals."

CHECKPOINT SEARCHES

The new bill also proposes tightening controls on foreign security firms by making them register and apply for a licence to work in Iraq, and for all guards to have weapons permits. That process has begun but has been mired in bureaucracy.

A potential source of friction is a proposal to make foreign security guards, and the convoys they are protecting, subject to searches at Iraqi security force checkpoints.

That could cause problems for high-profile convoys, several security sources in Baghdad said, as they need to keep on the move to minimise the risk of attack.

Many Iraqis see foreign security guards as little more than private armies who travel in heavily armed armoured convoys that bulldoze their way through traffic, threatening to open fire on motorists who venture too close.

"They (Iraqi police and soldiers) will see this as a chance to bring Blackwater and other high-profile security teams down a peg," said one security contractor, who declined to be named.

The Iraqi government has said that an investigation into the Blackwater shooting found no evidence that the guards had come under fire during the incident.

Erik Prince, the founder of Blackwater, which protects U.S. diplomats and other officials in Iraq, told a U.S. Congressional hearing that his men had come under small-arms fire and "returned fire at threatening targets". (Additional reporting by Mark Trevelyan in London and Randall Mikkelsen in Washington)

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